Ageing population pushes welfare bill to crisis point

Britain’s rapidly ageing population threatens to push the NHS and state
pension system to the brink of collapse, according to an international study
that found almost a quarter of the UK economy is consumed by social welfare.

The report underlines the size of the task facing David Cameron and George OsbornePhoto: PA

Despite ministers’ claims that welfare costs are being brought under control, figures show that the Coalition has failed to cut the share of Britain’s wealth that is dispensed in benefits.

In a report released tonight, the Organisation for Economic Cooperation and Development said that the proportion of GDP spent on jobseekers’ allowance, pensions and other “public social spending” stood at 23.8 per cent — the same as it was in 2010. The Paris-based think tank warned that unless action was taken to cut the cost to the state of Britain’s rapidly rising elderly population, the health and pensions systems could collapse.

The report underlined the size of the task facing David Cameron and George Osborne as they seek to get a grip on the budget deficit, with fresh cuts already planned for beyond the next election in 2015.

Figures released today showed that the economy was on track to recover from the economic crisis, with employment back at the same level as it was in 2008. The economy grew by 0.6 per cent between April and June, on top of a rise earlier in the year.

However, despite broadly positive signs, economic activity is still well below the level enjoyed before the financial crisis and Britain faces years of austerity and uncertainty.

The Prime Minister has indicated that he would like to go further in scaling back welfare but has been hampered by the Liberal Democrats, who refuse to contemplate further cuts to benefits. Tory ministers have proposed radical options, such as limiting child benefit payments to the first two children in a family.

According to the OECD, Britain spends a greater share of its resources on welfare, health and pensions, at 23.8 per cent of GDP, than the average across the 34 world economies in the OECD, which stands at 21.9 per cent.

However, the UK is still outspent by the rest of Europe, which uses an averge of just over a quarter of GDP for welfare, at 25.2 per cent.

Rates of benefits in Britain have risen significantly in recent decades. During Margaret Thatcher’s first 12 months in Downing Street in 1980, just 16.5 per cent of GDP was spent on social welfare.

Willem Adema, the senior economist at the OECD who wrote the latest report, said the last Labour government’s decision to increase family tax credits, combined with an ageing population, had driven up Britain’s welfare bill. Costs have not fallen more quickly since the Coalition came to power because of “the relatively slow growth” in the economy, with more people continuing to require income support, he said.

Conservative MPs and think tanks want ministers to move faster to cut the welfare bill. Some have even called for spending on the NHS and state pensions to be cut in the same way that other public services have suffered from austerity.

Mr Osborne has insisted on ring-fencing the NHS budget, while state pensions are guaranteed to rise every year by a minimum of 2.5 per cent under the Coalition’s reforms.

Mr Adema warned that debates over cutting pensions and health care “will not go away” as Britain’s population ages.

“You have got to pay for it. In the current period of ongoing crisis, that is a concern,” Mr Adema said.

“That is why countries are interested in pension reform, just to make sure that the system they have is sustainable. Governments are very wary of cutting pensions and benefits of those who are currently in retirement, so a lot of reforms are intended to increase retirement ages,” he said.

More generous pension programmes across Europe, which allowed people to retire earlier, have had to be abolished, he added.

Ministers have repeatedly boasted about how they have brought the welfare system under control by cutting unemployment and tackling dubious claims. However, official projections earlier this year indicated that the total benefit bill will be almost £18 billion higher in 2015-16 than in 2011-12; the equivalent of about £1,000 for every household. Both Labour and the Tories have backed the idea of a cap on total welfare spending, but only Ed Balls, the shadow chancellor, wants to include pensions within the limit in future.

A spokesman for the Department for Work and Pensions said: “Our welfare reforms are helping to bring the benefits bill under control. But many of the changes that will bring significant savings, like the cap on annual benefit increases, only began this April and therefore will generate savings further down the line.”